The Code of Practice on dismissal and re-engagement - What should employers take from the Supreme Court's decision in the Tesco case?

The Code of Practice on dismissal and re-engagement, aimed at improving practice where employers 'fire and rehire' has been in place since 18 July 2024. This month the Supreme Court provided some rare guidance in this area and on contracts of employment in general. What should employers take from the case?

The issue of 'fire and rehire' is a controversial one. It involves the ability of an employer to terminate a contract with an employee in order to introduce terms and conditions that are different or less favourable to the employee. Sometimes an employer can introduce a new contract by agreement, but where negotiations fail, employers sometimes resort to terminating the contract and offering to rehire on different or less favourable terms. We reported on this here, shortly before the Conservative Government brought into force its Code of Practice on dismissal and re-engagement. We also reported at the time on the claim brought against Tesco by USDAW on behalf of workers who had been dismissed and rehired in order to remove a relocation bonus that they had understood to be permanent. The workers had obtained an injunction in the High Court to stop Tesco pursuing this course, which had then been overturned in the Court of Appeal. USDAW appealed to the Supreme Court.

The Supreme Court's ruling was handed down on 12 September.  It decided that Tesco had not been entitled to dismiss and rehire in these circumstances, even though it had a general right in a separate clause to terminate the contracts of the affected workers. By doing so it had broken the promise it had made to them, through a clear provision in their contracts that if they accepted a relocation to a new workplace their pay would be enhanced permanently. 'Permanently' meant subject only to their remaining employed in the same role and to two other conditions attached to the pay enhancement continuing to be fulfilled. The Supreme Court thought that it was not open to an employer to use the 'fire and rehire' mechanism to get round a promise of that kind, although it might be a legitimate tool in other cases. It thought that the case was similar to past cases where employers have been prevented from terminating a contract if the effect would have been to deprive an employee of the benefit of permanent health insurance, which the employer had effectively promised to provide on an indefinite basis.

The lesson for employers is to be careful about what they promise and on what terms. Their right to change the terms of a contract by dismissing and rehiring is not unfettered – not only because of the new Code of Practice but also because it is clear from the Tesco case that the courts will scrutinise carefully the nature of the promises made in an employment contract. Many employers have adjusted the wording of their template contracts in response to the cases on permanent health insurance to make it clear that the benefit is not, in fact, permanent, but can be brought to an end if the contract is terminated. Employers offering incentives to employees to do something unpalatable mid-way through the employment relationship, as was the case in the Tesco litigation, may find it more difficult to achieve agreement on those terms. But they should nevertheless be careful about the words they use and if they do not intend a bonus or benefit to be permanent, try to use language that makes that clear.